19th May 2023

Did you know there are hidden advantages in paying into the pension pot of your adult children?

A little-known tax rule means parents can give a triple boost to their adult children by paying into their pensions. Not only will it boost kid’s retirement savings, but it also saves income tax, inheritance tax and can help them reduce or avoid the child benefit charge for higher earners.

The contribution by you is treated as if it had been made by them. If you pay £800 into your child’s pension, they will get basic rate tax relief on the contribution, taking the amount in the pot up to £1,000.

If the child is a higher-rate taxpayer, they can claim higher rate relief on the contribution made and reduce their tax bill.

If the child is affected by the ‘high income child benefit charge’, earning in the £50,000-£60,000 bracket (or slightly above), the money contributed is deducted from their income before the high income child benefit charge is worked out, thereby reducing their tax charge,  for example, if they are earning £60,000 and therefore faces a child benefit tax charge of 100% of their child benefit amount, a  pension contribution by the parent of £8,000 (grossed up to £10,000 by tax relief) would reduce the recipient’s income to £50,000 for purposes of the child benefit charge and would completely eliminate the tax charge.

Apart from wanting to help your children, you may be interested in this idea particularly because contributions may reduce future Inheritance Tax bills, if they qualify for one of the standard exemptions, such as regular gifts made from regular income.

The amount that you can contribute with the benefit of pension tax relief is not limited by your pension tax relief limit but by the limit that your children face – which in many cases will be up to their annual salary or £60,000, whichever is the lower.

Do not forget pensions themselves are free from Inheritance tax. For more creative Investment, estate and tax planning solutions contact Pippa Vaughan-Avery at Abacus Assurance on 01656 772222.